Up-to-the-minute advice, information, resources, and, on occasion, commentary on federal and New Jersey state income taxes, and the various New Jersey property tax rebate programs, and insights and observations on tax policy and professional tax practice, by 40-year veteran tax professional Robert D Flach.

Tuesday, January 4, 2011

2010: THE YEAR IN TAXES – PART II

The new “gimmick” for 2009 tax returns filed in 2010 was BO’s “Making Work Pay” credit, which replaced George W’s “rebate” checks. While a step in the right direction, this credit turned out to be, like Dubya’s rebates, more trouble than it was worth.

The credit was based on 6.2% of earned income – W-2 wages and net earnings from self-employment – up to a maximum of $400.00, or $800.00 for a married couple filing jointly. The 6.2% rate is equal to the Social Security tax.

BO chose to make MWP an advance on a Form 1040 credit and issue it by FU-ing with the federal income tax withholding tables. As a result many retirees ended up being under-withheld, as pensions also use these tables to determine withholding. So did taxpayers with more than one job, married couples in general, and working dependents who did not qualify for the credit.

There was much confusion regarding the MWP credit – both by taxpayers and the IRS. According to the Treasury Inspector General for Tax Administration – “TIGTA auditors analyzed 2010 filing season results as of the first week of March, 2010. As of that time, the IRS had paid some $24.2 million in erroneous Making Work Pay and Government Retiree Credits”.

The Making Work Pay credit expired on December 31, 2010, and has been replaced in the Tax Hike Prevention Act (for tax year 2011 only) by a 2% reduction in the employee share of the Social Security component of FICA payroll taxes. This comes out to a maximum of $2,136 per person.

This wasn’t the only tax credit that caused problems in 2010. TIGTA also discovered -

“While the IRS received about 132 million individual income tax returns and issued approximately 101 million refunds totaling $291.7 billion through May 28, 2010, those returns contained nearly 23.7 million errors, an increase of 7.1 percent over the same period last year. TIGTA identified inadequate controls and incomplete and inaccurate programming resulting in 125,762 individuals receiving nearly $111.4 million in erroneous Recovery Act-related tax benefits, including:

• 10,581 individuals claiming $65.6 million in erroneous First-Time Homebuyer Credits (IRS prevented 2,363 of them from receiving some $11.3 million in credits);

Regarding the First-Time Homebuyer Credit claims TIGTA reported that 1,300 prison inmates – including 250 serving life sentences – received $9 million for homes that they could not have purchased while they were behind bars. Another 10,000 people received credit for homes that were also claimed as a first-time purchase by another taxpayer. In one case, 67 people used the same house as their qualifying purchase.

Another 2010 TIGTA report stated –

“The EITC was created in 1975 to offset the impact of Social Security taxes for individuals who work but have low incomes. The refundable nature of the EITC and the complexity of eligibility requirements increase the likelihood of taxpayer error and fraud. The IRS estimates that between $11 billion and almost $14 billion in erroneous EITC claims are paid annually. For Tax Year 2008, individuals claimed $49.2 billion in EITC; 66 percent of the returns were prepared by tax return preparers.”

All more proof that refundable tax credits = an open call for tax fraud.

Several tax reform reports were issued in 2010, all beginning by stating the obvious – the current federal Tax Code is too complicated and convoluted and needs to be fixed – and discussing suggestions, considerations and proposals for serious tax reform.

The first came on August 27th when the President's Economic Recovery Advisory Board (PERAB) released its report (originally scheduled to be presented to BO by December 4, 2009). FYI, I was listed in the Appendix of the report as a source of public comment presented to the Board.

As happened with the report issued by Dubya’s 2005 tax reform panel, the board was told thanks for your hard work and the report was totally ignored, sent to gather dust on the shelves of the federal archives.

On November 10th the co-chairmen of President Obama's National Commission on Fiscal Responsibility and Reform published a discussion draft of another BO requested tax reform report.

Later in November the Bipartisan Policy Center’s Debt Reduction Task Force issued “Restoring America’s Future”, still another comprehensive plan to solve debt crisis, create jobs, simplify taxes, and fix Social Security, this one by a non-BO created non-profit organization.

On December 1st The National Commission on Fiscal Responsibility and Reform issued its final report titled “The Moment of Truth”. The commission co-chairmen didn’t change their basic framework from what they unveiled in the draft report, but rather refined it to be more specific and realistic.

House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid promised to bring the recommendations up for a floor vote, but only if the proposal got the support of 14 of the 18 commission members. Only 11 members voted to accept the report, so nothing happened.

BO and incoming chairman of the House Ways and Means Committee Republican David Camp have promised to begin a serious discussion of tax reform in early 2011. BO indicated that Democrats and Republicans should begin a conversation next year about a broad overhaul of the U.S. tax code that would involve lowering rates while eliminating tax breaks for favored groups, Camp has said, "I think we have to reform our complex, burdensome tax code. It's 10 times the size of the Bible with none of the good news." Let us pray that they keep their promises.

In addition to the Tax Hike Prevention Act Congress passed the following tax bills in 2010, further complicating the mucking fess that is the US Tax Code -

• The Homebuyer Assistance and Improvement Act of 2010 - July 2, 2010, and

• The Small Business Jobs Act of 2010 – September 27, 2010

As for my own 1040 practice I again found myself with too many GE extensions on April 14th, some of which were not completed until the end of the year. I have vowed “nevermore” and will institute changes to my policies and procedures in 2011 to reduce GDEs to only those that are absolutely necessary. Wish me luck!

I have been a published author for quite some time now, but in 2010 I became a paid author, writing 90 items on taxes for MAINSTREET.COM, including a daily week-day tax season column. I will continue to write for MAINSTREET.COM in 2011, but the tax season series will appear only twice a week in January and February, going daily in March through the end of the season in April.

So that was 2010 – the year in taxes. Did I forget anything important?

Before contacting me with questions about how a blog post relates to your specific situation, please be aware that I do not give free tax advice to non-clients by e-mail, comment response, or phone. So don't waste your time and mine.